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VocaLink In Talks About £2bn Italian Merger

The company behind much of the UK's critical payments infrastructure is in secret talks about a £2bn merger with a state-backed Italian counterpart to create a European industry powerhouse.

Sky News can exclusively reveal that VocaLink has been holding discussions about a tie-up with Sia, reflecting an intensifying focus on consolidation among key players in the European payments industry.

A deal involving VocaLink, which is owned by 17 of Britain's biggest high street lenders, is likely to attract political and regulatory scrutiny given the degree of sensitivity which surround the UK's payments infrastructure.

VocaLink, which is an independent business, is responsible for delivering the Faster Payments Service and the Bacs service which underpin millions of payments including mortgage transactions and salary transfers each day across the UK.

The company was behind the delivery of the Current Account Switch Service which launched in the UK in 2013, and which was hailed by ministers as a key component of plans to make the retail banking sector more competitive.

VocaLink also oversaw the introduction of the new Paym mobile payments service used by a number of major UK banks, and is a big investor in Zapp, a smartphone app, which enables bank customers to pay for goods and services in-store and online using mobile devices.

VocaLink's discussions with Sia are said to be at a preliminary stage, and could take several months before they result in a conclusive agreement to merge.

A source close to one of the banks which is a shareholder in VocaLink said that a number of private equity firms had also expressed an interest in buying a substantial stake in the UK-based payments group.

However, a merger with Sia is thought to be the VocaLink board's preferred option, which if completed would result in an Italian state fund having a sizeable stake in the UK's payments system.

The shareholder source added that a combined VocaLink and Sia could be worth in the region of 3bn Euros (£2.1bn).

As investors, Barclays (LSE: BARC.L - news) , HSBC, Lloyds Banking Group (Other OTC: LLOBF - news) , Nationwide, Royal Bank of Scotland (LSE: RBS.L - news) and Santander UK (LSE: 44RS.L - news) are all represented on VocaLink's board.

Fondo Strategico Italiano (FSI), the country's sovereign wealth fund, owns more than 40% of SIA, having acquired that interest from a number of banks nearly two years ago.

The quickening pace of cross-border consolidation in payments is being driven by a recognition that such infrastructure does not necessarily need to be owned along traditional geographical lines.

Insiders say that very large synergies could be realised by combining groups which operate in the industry, a fact that was underlined this week by an announcement that Worldline, which is headquartered in France, and Dutch-based Equens, planned to merge.

Recent corporate activity in the sector, including the takeover of Nets in Scandinavia by two private equity firms, has also fired interest in a new round of consolidation.

The two new Nets shareholders, Advent International and Bain Capital, have also reaped huge rewards from the London flotation of Worldpay.

VocaLink made operating profit of £16.5m in 2014, a figure that was depressed by an investment in Zapp.

Under Sir John Gieve, the former Bank of England deputy governor who is its chairman, and chief executive David Yates, the company has expanded abroad, signing key agreements in Singapore and more recently the US.

Underlining the UK's leading role in the global financial technology - or fintech - sector, VocaLink last month signed a deal with The Clearing House to build and deliver parts of its new realtime payments system in the US.

The attitude of the UK's new Payment Systems Regulator, led by Hannah Nixon, may have an influence on any merger between VocaLink and Sia.

Ms Nixon has previously raised the possibility that the big banks and building societies should relinquish ownership of the UK-based company.

VocaLink declined to comment on Thursday.